ELLIOTT WAVE ANALYSIS - Latest Market Commentary
As global stock indices are edging higher, the picture is becoming more and more mixed which reflects the uncertainty present in the markets. This is primarily because of the proximity of most indices to their original Elliott Wave target areas coupled with a generally overbought condition. Although the short-term outlook for the S&P 500 and Dow Jones (DJIA) suggests a slight extension to original higher objectives, the Eurostoxx 50 and Shanghai’s Composite Index are in a very vulnerable position as their pattern structure is approaching completion. Is it an irony that at this point of time the Chinese Alibaba group stages the U.S. history’s largest initial public offering that, according to Bloomberg, owes its size to a virtual non-stop rally in U.S. shares with a value increase of US$ 15 trillion over the last years? Might this be a contrarian signal par excellence? ###The euphoria sparked by this event could fuel another finalising attempt higher followed by a major reversal that would set a directional change for the next several months to come. The most diverging outlook to this scenario is provided by the Nikkei which has significantly outperformed during the last weeks and, more recently, broken above its late Dec.’13 high of 16320.22. This gives way to a 7% upswing from current levels which seems quite rich when compared to most of the other indices. Yet the comparison with the US$/Yen, positively correlated with the Nikkei 225, suggests upside targets to 17500.00+/- for the stock index are viable.
Continuation higher for the US$ index suggests that the smaller 3rd wave within the upswing from the July low of 7974 is still underway – upside projections measure to 8551 for a finalisation. A reversal from there will then trigger a temporary sell-off to idealised support at 8386 prior to continuation higher. This is not as closely mirrored by the Euro/US$ as the currency pair is already engaged in a corresponding smaller 5th wave which allows for the completion of the entire downswing from the July high of 1.3701 towards downside support at 1.2758. This discrepancy of degrees might be resolved during the next few weeks as the Euro could unfold into a counter-trend expanding flat pattern – the ‘B’ wave of this sequence could synchronise with the US$’s 5th wave into new price extremes prior before both stage a more pronounced counter-trend move. The more important change on the Euro/US$ is the slight revision of the ultimate downside objective. Basis the amplitude correlation with the US$ index, it seems unlikely the Euro could finalise its multi-month downswing from 1.3993 at ultimate objectives of 1.2528. Instead, slightly lower levels towards 1.2417-1.2396 are now in focus, based on two different fib-price-ratio measurements. Following Scotland’s rejection of its independence in the long-debated referendum on Thursday,### Sterling shot higher into a recorded high of 1.6525 but was subsequently rejected. The rally from the 1.6052 low is seen as counter-trend in nature and there is some validity in the assumption that it could already have completed as the substructure depicts a single zig zag advance to 1.6525. This allows to gauge the support level towards 1.6246 where wave ‘C’ of the zig zag began – a break below there would naturally eliminate a 1-2-1 as well as a 1-2-3 sequence from 1.6052 and thus significantly lower the probability of an upward acceleration from current levels. US$/Yen’s strong correlation with the Nikkei 225 is evident as the upside momentum for the stock index was mirrored by the currency pair’s advance in the latter half of last week. This indicates that intermediate wave (4) that was previously shown unfolding into a 2-year counter-trend expanding flat sequence instead unfolded into a contracting symmetrical triangle that already completed at the July ’14 low of 10106. The current advance from there is labelled as wave (5) with ultimate objectives towards 11238 to finalise primary wave 1. Thus, a reversal from 11238+/- will begin a substantial multi-month counter-trend decline.
Bonds (Interest Rates)
US10yr yields traded into a high of 2.655% last week. Seen from this year’s low of 2.300%, the upside momentum clearly points towards additional gains. Shorter-term, however, there could be time for a temporary pause as the advance so far might have completed either a 1-2-1 or a 1-2-3 sequence from 2.300. In the first case, a more pronounced counter-trend decline could occur – this would also tally with the corresponding futures that are about to complete wave ‘D’ within a multi-month contracting triangle and are poised for an upside move as wave ‘E’ during the next weeks. In the second case, only a modest retracement is expected (idealised support is measured to 2.520+/-) prior to continuation higher. The overall picture remains ###strongly bullish as US10yr yields have completed a multi-month counter-trend expanding flat sequence at 2.300%. Meanwhile, DE10yr yields are still trading in a rather constricted trading range. Upside acceleration has not occurred so far which suggests that they are bound in an expanding flat pattern that is likely to finalise during the next few trading sessions. This is corroborated by the Bund future which staged strong price rejection from last Friday’s low of 147.63. It suggests an upswing towards 148.90 prior to a reversal that would initiate downside acceleration and thus reinforce the larger downside tendency – correspondingly, DE10yr yields should engage in 3rd of 3rd upside acceleration. Failure to do so would open up the possibility of an additional break below the 0.858% low.
Precious metals sold off sharply on Friday. Gold approached its downside support area at 1211.03+/- whilst silver broke below its equivalent 18.22+/- level. This significantly weakens the case for the alternate scenarios that depict a reversal from current levels followed by a substantial advance during the next months, with gold targeting 1475.00+/- and silver 25.12+/-. Although a reversal from current levels is still possible (which would, in silver’s case, transform the alternate horizontal flat into an expanding type), gold’s current downswing from 1344.93 looks incomplete which adds downside pressure and thus corroborates the immediacy of additional declines. This emphasises ###the preferential counts. In the case of gold, a continuation towards the 1100.00+/- area is expected, and silver is not far away from its min. objective to 17.48 which increases the likelihood for lower objectives to 16.46. Oil is also weak as it is approaching its September low of 90.43 and expected to continue lower. Basis fib-price measurements, next downside support is projected to 88.21 to end a smaller 3rd wave. Overall, the downtrend in progress from the June ’14 high of 107.68 is firmly established and expected to continue in the months ahead. Ultimate objectives remain towards 77.28 to finalise a multi-year horizontal flat sequence.